The Phantom Dollar

I am no economist. I don't play the Wall Street game. And I don't have any credit cards. So my perspective on the American economy is not very similar to those held by American investors, creditors, politicians and economics professors. Please excuse the un-refined nature of my language in discussing this. After re-reading this article, I realize that it needs a lot of refinement... so please consider this as a work-in-progress.

There is little doubt that the economy is faltering. Presidential candidates Barack Obama and John McCain are both discussing an America in recession—a description that has been taboo in popular media and politics for years.

Ever since I was a teenager, I have heard people say that I need to foster good credit. Raise that credit score! I have turned my back on it—not by abusing credit cards... but by turning my back on the credit card mentality altogether. My mentality has generally been that I should pay cold hard cash for things I purchase rather than credit with interest. If I want something, I save until I can pay for it; if I can't afford it, I do without. (The exception, of course, is our home... by the time I could save enough money to afford a home to fit my family, my family will be away from the nest anyway...)

What is always distressing to me is that whenever I discuss financial issues, almost anyone and everyone I talk to tells me, "You need to generate credit.” Loan officers, relatives, friends, almost everybody I talk to thinks about credit in the same way that they think about primal needs such as food, shelter and clothing; or that credit is equal in value to employment.

This mentality is, in my opinion, another wool pulled over the eyes of the American public, similar in fashion to the bamboozle the insurance industry has on the American public. Banks and investment firms have a great stake in the value of credit as perceived by the American public—if Americans did not see borrowing as a necessity, most banks would probably have a lot less money to pump into their coffers and those of their constituents. Financial institutions actively reinforce the idea that credit is a commodity, even though credit is not an actual good whatsoever.

I think the average person thinks that economics is much more complicated than it really is; that we need economists to keep things running when in fact, we don't. Economists roles have been to justify business as usual—namely, the keeping of resources flowing towards financial institutions and stock holders. Economists turn a blind eye to the reality of economics—there is only a finite number of American dollars.

Let's do a little thought experiment. Suppose you have one hundred people that make up a small community. Divide that community into a mayor, a banker, a sheriff, a grocery, a teacher and three wealthy land owners. The other ninety-two people are farmers or farm hands. In this little community, which we will call Creditville, the three wealthy land owners account for the majority of the money in the bank. Suppose that the total number of dollars this community has is equal to $10 million and it is distributed such that $9 million belongs to the three land owners and the banker (for simplicity sake, our bank in the community is owned by a single person). The rest of the money "belongs" to the remaining people in the fashion of revolving money--money that comes in this month but leaves immediately to pay the mortgage, utilities, groceries, gas, etc.

Now suppose that the wealthy land owners want to increase how much money they have. None of them is inventors, so they cannot create new things to sell; they are not scientists, mathematicians or technicians... so they cannot innovate on new technologies. They have no skills. They simply have money—which for them is fine, since that is their passion anyway. The wealthy men meet with then banker and create a new method for them to increase how much money they have—they will start lending their money to the other people in the community; the money is made in the form of a percentage interest applied to the loans.

Now the people in the community hear about this new opportunity to purchase things they could not afford before. Everyone goes to the bank and suddenly people that had only a few hundred dollars to spend on trivial things suddenly have thousands or hundreds of thousands of dollars with which to purchase things. Suppose that everyone in the community other than the banker and land owners borrows $50,000... using $4.8 million. The banker and land owners seem generous until the bill comes. If the bank is charging 10%, interest is compounded ten times a year and the loan is ten years, the borrower will pay back over $135,000 to the bank.

Here is a fundamental problem. Each person will have to pay back $13,000 per year to the bank as part of its compound interest—which equates to about $1.4 million. That is $400,00 more than the 96 people are even making in a year! In this scenario, the entire community owes more than they can possibly make. The farmers suddenly cannot feed their families because of the debt. They foreclose on their loans and the properties revert to the bank and the already wealthy landowners.

That is a very simplified example of credit. But it demonstrates the fundamental problem with a populace that is using credit.

When I heard of the government plan to bail out Morgan Stanley and Goldman Sachs, I marveled that another solution was not considered. I have not heard what the details were... but all I have heard is that the money is going to these companies to keep them afloat; I presume that the money is intended to go to the investors behind these companies. At the same time, I don't hear anything about what it means for the borrowers. It's funny that the debt doesn't seem to be addressed—the very issue causing the economic crisis.

If the American tax dollar is going to bail out these large companies, the then the American public ought to have direct benefit—something more tangible than the promises of economists that helping the financial institutions stay in business is worth everyone's interest. What I am saying is that by giving these institutions money (that came from the public) then an equivalent amount of public debt ought to be simultaneously erased. In other words... consider this bail out a $700 billion payment on principal that the public owes to these companies! If you don't do that, then the this bail out does very little for the average person who is drowning in debt and shows how much our politicians have bought into (or been bought by) the lies of a society built on credit.

Americans have long felt that we are built on a democratic approach to life; that our society does not work like older civilizations such as monarchies, aristocracies, dictatorships, serfdoms, etc. We feel that we are the most liberal country because we have given equal rights to all based on race, religion and sex. We have abolished racial slavery.

But one thing that we seem to forget: humans of today are identical to humans that lived in other conditions; the same traits that made racial slavery acceptable a hundred years ago have not magically disappeared from the human psyche. Modern slavery still exists in America, and probably more prevalently than it did a hundred years ago—the modern slave is the public, which is in debt to a minority of investors.

I am not one to look to the Bible for solutions to modern problems. However, there was a very useful custom in ancient Israel regarding debt: every seven years, all debts were canceled. It's interesting that such an old society would espouse such a democratic concept. Proverbs 22:7 said, "...the borrower becomes the lender's slave.”

Borrowing is a part of human life. Individually, we borrow our siblings' clothes and then return them. It's natural. In business, the stakes go higher because more than the original commodity is expected in return for the transaction; here, another element of human psyche comes to play—greed. Lenders (human beings) are trying to get as much as they can get regardless of the consequences; borrowers (human beings) are trying to satisfy instant gratification regardless of the consequences. Both sides are myopic. The lenders, however, present themselves as if they are shouldering the risk; in reality, they are banking greedily on the uneducated masses to sell out their own futures.

I apologize that my brief discussion on American economics may seem a little scatter brained. The truth is that I have a good sense as to the problem... I just struggle to articulate it as it appears in my head. I'll probably append to this article or edit it as new ideas or criticisms come my way.